Market Update – What Now?

30 September 2008, by CANDICE PAINE

If you have been invested in the equity markets this year, you have been called upon not only to have patience, but also to be forgiving. If you are a fund manager, you have had to have had steel nerves.

Let us recap what has happened year-to-date. For the first 6 months of the year, equities were the best performing asset class even beating cash. Bonds and SA listed property had negative returns for the same period as interest rates and inflation rose in two step. But not all equities had performed equally. The performance of the All Share was propped up by a few big resources companies reflecting the global commodities boom while financial and industrial share prices fell dramatically. Increasing local interest rates, slowing global growth and the fallout from the US subprime crisis fed right through into these share prices.

In the middle of June, the fate for many equities changed suddenly. The US Federal Reserve pledged billions of dollars to bail out the beleaguered mortgage finance giants, Freddie Mac and Fannie Mae. Almost simultaneously, Investec Asset Management pointed public attention to the fact that the SARB monetary policy was being based on an overstated inflation figure. The market’s interpretation of these events was that the global economy had found a saviour in the US Federal reserve and that the local interest rate cycle had perhaps topped out. Financial and industrial stock prices started rising. Resource stocks were less lucky. Slowing demand began pulling commodity prices down as the expectation grew that global growth would slow. Speculative investors began taking bets that resources stocks would fall further and this becomes a self fulfilling prophecy. We have also seen the prices of oil, platinum and gold wavering.

Since June, the resources index is down 40% and financials are up just over 7%. Industrial stocks have had patchier performance but on balance, the index was in positive territory up until the recent market turmoil. This has been more stock specific, but some sectors had seen a broad based rise, particularly General Retailers (Foschini, JD Group, Mr Price and Truworths) which were sold down significantly at the beginning of the year. Pharmaceuticals and healthcare have also been positive as have certain food producers and food retailers and a handful of construction stocks.

The past few weeks have seen the US credit crisis increase in its intensity. We have seen Lehman Brothers filing for Chapter 11 bankruptcy; Merrill Lynch being bought out by Bank of America; AIG turning to the Fed for assistance; Fannie Mae and Freddie Mac rescued by the government; JPMorgan buying Washington Mutual; both JPMorgan and Goldman Sachs changed their status to bank holding companies to be able to take retail deposits …

this list goes on and on and does not bode well for global financial markets. And the most recent news of the Republicans voting against the proposed $700bn bailout plan by the Bush administration may just bring Wall Street to its knees – we have just seen the biggest single Wall Street drop since the 1987 market crash. Although most South African financial institutions have so far experienced only limited direct exposure to the global credit crunch, the second round effects will come in the guise of negative investor sentiment and fear, and may still cause our
stocks to stumble. There is no denying that the markets are tricky at the moment. No-one has yet been able to quantify the extent of
the fallout from the credit crisis. Global inflation seems to still have some way to go before it stabilizes and the US consumer is faltering. There is no clear direction in the markets and shares bought for sound investment reasons are penalized by fear for the smallest reasons. It is a very difficult time for equity fund managers to give investors the large positive return they have become accustomed too in the preceding five years. But this is where patience and resilience are required. There are plenty of worthwhile stock opportunities out there for the discerning stock picker,
but they may take a little longer than normal to realize value. You need to remember that investing in the stock market is a volatile business -but patience during the most volatile times pays handsome dividends in the long run.